Although many industries have suffered significant losses during the COVID-19 crisis of 2020, from the look of things, the Forex market is doing just fine. At the moment, the global Forex market is worth roughly $1.93 quadrillion. Yes – quadrillion – you read that right.
Although the world of Forex trading might seem intimidating to some, it’s not impossible to learn. Since there’s no better time to enter the world of Forex, now’s the time to start familiarizing yourself with the basics. Today, we’re going to talk about Forex indicators.
More specifically, we’ll discuss:
- What Forex indicators actually are
- How can you recognize the best forex indicators
- 5 Forex indicators every currency trader should know
Without wasting any more time, let’s start…
What Exactly are Forex Indicators in the First Place?
People with some Forex industry experience can skip this part, but if you’re a complete beginner, we should talk about indicators.
Forex technical indicators consist of complex calculations that traders use based on volume, interest, and exchange rate. Stock market traders typically look at the price of stocks. Forest traders, on the other hand, look at the exchange rate of a currency pair.
A vast majority of the biggest forex indicators are calculated from exchange rates. If you’re trading currency pairs, you may be able to use the open interest and volume numbers provided by exchanges like The International Monetary Market, which list future contracts.
To sum up: forex indicators are calculations used to forecast price changes on the currency market and plan your next investment.
How to Use Forex Indicators?
The next logical question is, how can you use the best Forex indicators?
If you’re new to the concept of trading, a good idea would be to select a beginner-friendly broker. Look for a broker that will provide you with a good amount of learning material on technical analysis tools you can incorporate into your trading strategy.
Once you fully adopt an analytical trading approach, you start wondering which Forex indicators should you use. To find the best Forex indicators, you need to determine:
- Your goals as a Forex trader
- The resources you have available
- Your trading aptitude
When you narrow this down, the right indicators will begin to emerge. Both in practice and theory, many indicators can be applied to the price in many different ways. However, two of the most widely used methodologies are:
- Oscillators: This type of indicator gravitates between two pierce chart levels. It shows the trader when securities are oversold or overbought. Traders often use oscillators to determine the state of the market at a given moment.
- Support & Resistance: A good number of forex analysis is based on the concept of support and resistance. The support level the point on the pricing chart where the price doesn’t go down. The resistance level is a point where the price doesn’t go up.
Top 4 Indicators Every Currency Trader Should Know
Traders, both experienced and inexperienced, use the best Forex indicators as a part of their market analysis strategy in an effort to make informed decisions. Forex indicators should help you eliminate all of the guesswork out of trading and make your decisions more objective.
Of course, not all indicators are created equal. Some are more useful – and in turn, popular – than others. Some may be used in most cases, while others are there for specific situations. A great indicator has broad applicability. Here are some indicators, everyone should be aware of.
- Moving Averages
To make smart investments, you need to know what way the market is moving in, right? Most traders use Moving Averages to get a sense of the underlying direction of the Forex market. In Currency Trading, there are four basic types of Moving Averages. All of these are used fairly often in Currency Trading:
- Simple Moving Averages
- Weighted Moving Averages
- Smoothed Moving Averages
- Exponential Moving Averages
You can use moving average on the low, high, open, or even closing exchange rates. The last is the most popular among Currency Trader nowadays.
- Commodity Channel Index
This particular indicator was developed for trading commodities. Created almost 40 years ago by the famous mathematician, Donald Lambert, the Commodity Channel Index has transformed significantly over the years. Nowadays, it’s used in the CFD, equities, and Forex markets, respectfully. Like other indicators, CCI helps you put the behavior of the Money Market into proper context by comparing the current price to an average value.
- Parabolic SAR
SAR stands for “Stop and Reverse.” This indicator is mainly used to identify directions of market trends, along with potential reversal points. Unlike other indicators on the list, Parabolic SAR isn’t that conventional. While it does help you see whether the market is currently oversold or overbought, it doesn’t employ any standard scale.
It does, however, employ a series of dots. The indicator is created by strategically placing dots below or above certain trends on the pricing chart. It gives you a virtual representation of the biggest trends on the market, pull-backs, and even potentially reverse points.
- Pivot Points
A pivot point is used to establish an area of support and/or resistance by analyzing lows, highs, and closing values of security. Pivot points are powerful tools for examining normal trading ranges, directions, and sporadic price actions as they occur.
There’s a number of ways to calculate pivot points and one of the most popular ones starts with taking the simple average of periodic lows, high, as well as closing values and then, applying them all to a periodic trading range. You can use them to examine the presence of a trending or range-bound market.
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In the begging, trading can seem abstract but through hours of careful studying of price action and application of the best forex indicators can become seamless. While there are many Forex indicators for you to choose from, always remember that the best ones are those that are both easy to use and that add value to your trading strategy.
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